The Federal Budget: Overview and Issues for FY2019 and Beyond

The Federal Budget: Overview and Issues for FY2019 and Beyond

Grant A. Driessen Analyst in Public Finance May 21, 2018

Congressional Research Service 7-5700

R45202

The Federal Budget: Overview and Issues for FY2019 and Beyond

Summary

The federal budget is a central component of the congressional "power of the purse." Each fiscal year, Congress and the President engage in a number of activities that influence short- and longrun revenue and expenditure trends. This report offers context for the current budget debate and tracks legislative events related to the federal budget. After a decline in budget deficits over the past several years, the deficit is projected to increase significantly in FY2019. Enactment of the 2017 tax revision (P.L. 115-97) and the Bipartisan Budget Act of 2018 (BBA 2018; P.L. 115-123) are projected to decrease revenues and increase outlays relative to past years, thus increasing deficits. The Budget Control Act of 2011 (BCA; P.L. 112-25) implemented several measures intended to reduce deficits from FY2012 through FY2021, and deficits declined from FY2012 through FY2015. In its April 2018 forecast, the Congressional Budget Office (CBO) baseline projects that the FY2019 deficit will equal $981 billion (4.6% of GDP), its highest value since the economy was recovering from the Great Recession in FY2012. The 2017 tax revision and BCA will continue to affect budget outcomes in FY2019 and beyond. Congress may debate amending the BCA as it has in the past through the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240), Bipartisan Budget Act of 2013 (BBA 2013; P.L. 11367), Bipartisan Budget Act of 2015 (BBA 2015; P.L. 114-74), and BBA 2018. The annual appropriations process, the statutory debt limit, and further tax modifications may also draw congressional attention in FY2019. Additionally, Congress may choose to debate structural changes to the federal budget, including reforms to mandatory and discretionary spending programs proposed by the House Committee on Ways and Means and the Trump Administration. The Trump Administration released its FY2019 budget on February 12, 2018. Proposed policy changes in the budget include increases in discretionary defense spending and relatively large decreases in mandatory spending other than Social Security and Medicare and in nondefense discretionary programs. Following passage of full-year FY2018 appropriations, Congress has turned its attention to the FY2019 budget. The Budget Committees in the House and Senate each develop budget legislation as they receive information and testimony from a number of sources, including the Administration, the Congressional Budget Office, and congressional committees with jurisdiction over spending and revenues. Trends resulting from current federal fiscal policies are generally thought by economists to be unsustainable in the long term. Projections suggest that achieving a sustainable long-term trajectory for the federal budget would require deficit reduction. Reductions in deficits could be accomplished through revenue increases, spending reductions, or some combination of the two.

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The Federal Budget: Overview and Issues for FY2019 and Beyond

Contents

Overview ......................................................................................................................................... 1 Budget Cycle ............................................................................................................................. 1 Budget Baseline Projections ..................................................................................................... 2 Spending and Revenue Trends .................................................................................................. 4 Federal Spending ................................................................................................................ 5 Size of Federal Spending Components Relative to Each Other.......................................... 7 Federal Revenue ................................................................................................................. 8 Deficits, Debt, and Interest...................................................................................................... 10 Budget Deficits ................................................................................................................. 10 Federal Debt and Debt Limit ............................................................................................ 10 Net Interest.........................................................................................................................11

Recent Budget Policy Legislation and Events................................................................................11 P.L. 115-97, the 2017 Tax Revision ........................................................................................ 12 The Bipartisan Budget Act of 2018 (BBA 2018) .................................................................... 13 Appropriations and Debt Limit Legislation ............................................................................ 14

Budget for FY2019........................................................................................................................ 14 Trump Administration's FY2019 Budget ................................................................................ 15 Deficit Projections in the President's FY2019 Budget............................................................ 16 FY2019 Congressional Budget Activity ................................................................................. 19

Considerations for Congress.......................................................................................................... 19 Ongoing Budget Issues ........................................................................................................... 20 Long-Term Considerations...................................................................................................... 20

Figures

Figure 1. Total Outlays and Revenues, FY1947-FY2017 ............................................................... 5 Figure 2. Outlays by Major Category, FY1962-FY2028................................................................. 6 Figure 3. Revenues by Major Category, FY1962-FY2028.............................................................. 9 Figure 4. Budget Deficit Projections, FY2018-FY2028................................................................ 17 Figure 5. Discretionary Cap Changes in the FY2019 Proposed President's Budget ..................... 19

Tables

Table 1. Selected CBO Baseline Budget Projections ...................................................................... 3 Table 2. Estimated Budget Effects of 2017 Tax Revision, Selected Years .................................... 12 Table 3. Discretionary Caps on Budget Authority Established by the BCA as Amended ............. 13 Table 4. Budgetary Effects of President's FY2019 Budget Proposals, FY2019-FY2028 ............. 15

Appendixes

Appendix. Budget Documents....................................................................................................... 23

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The Federal Budget: Overview and Issues for FY2019 and Beyond

Contacts

Author Contact Information .......................................................................................................... 24

Congressional Research Service

The Federal Budget: Overview and Issues for FY2019 and Beyond

Federal budget decisions express the priorities of Congress and reinforce its influence on federal policies. Making budgetary decisions for the federal government is a complex process and requires the balance of competing goals. The Great Recession adversely affected federal budget outcomes through revenue declines and spending increases from FY2008 through FY2013. The federal budget recorded a deficit of 9.8% of gross domestic product (GDP) in FY2009, the largest value since World War II.1 Subsequent improvement of the economy and implementation of policies designed to lower spending have improved the short-term budget outlook, though federal deficits remain at relatively high levels. In FY2017, the federal budget recorded a deficit of 3.5% of GDP, which was higher than the average deficit since FY1947 (2.7% of GDP).

Over the next several years, projections of a continued decline in discretionary spending are more than offset by increases in mandatory spending, increases in net interest payments, and reductions in revenues, leading to a rise in federal deficits. Increases in the long-term cost of federal retirement and health care programs and debt servicing costs each contribute to upward pressure on federal spending levels. Operating these programs in their current form may pass on substantial economic burdens to future generations. Revenues are projected to decline as a percentage of GDP over the next several years before increasing later in the 10-year budget window as provisions enacted by the 2017 tax revision (P.L. 115-97) are scheduled to expire. Congress and the President may consider proposals for deficit reduction if fiscal issues remain a key item on the legislative agenda.

This report summarizes issues surrounding the federal budget, examines policy changes relevant to the budget framework for FY2019, and discusses recent major policy proposals included in the President's FY2019 budget. It concludes by addressing major short- and long-term fiscal challenges facing the federal government.

Overview

Each fiscal year Congress and the President engage in a number of practices that influence shortand long-run revenue and expenditure trends. This section describes the budget cycle and explains how budget baselines are constructed. Budget baselines are used to measure how legislative changes affect the budget outlook and are integral to evaluating these policy choices.

Budget Cycle2

Action on a given year's federal budget, from initial formation by the Office of Management and Budget (OMB) until final audit, typically spans four calendar years.3 The executive agencies begin the budget process by compiling detailed budget requests, overseen by OMB. Agencies work on their budget requests in the calendar year before the budget submission, often during the spring and summer (about a year and a half before the fiscal year begins). The President usually submits the budget to Congress around the first Monday in February, or about eight months

1 Except where otherwise noted, all deficit and debt figures are expressed as a percentage of GDP, in order to account for inflation and business cycle effects. 2 This section provides an outline for the formulation and execution of a budget and appropriations cycle for a fiscal year. However, this timetable is not enforced by statute and often varies by year. 3 CRS Report 98-325, The Federal Fiscal Year, by Bill Heniff Jr.

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The Federal Budget: Overview and Issues for FY2019 and Beyond

before the beginning of the fiscal year, although submissions are often later in the first year of an Administration.4

Congress typically begins formal consideration of a budget resolution once the President submits the budget request. The budget resolution is a plan, agreed to by the House and Senate, which establishes the framework for subsequent budgetary legislation. Because the budget resolution is a concurrent resolution, it is not sent to the President for approval.5 If the House of Representatives and Senate cannot agree on a budget resolution, a substitute measure known as a "deeming resolution" may be implemented by each chamber, which may give force to certain budget enforcement measures.6

House and Senate Appropriations Committees and their subcommittees usually begin reporting discretionary spending bills after the budget resolution is agreed upon. Appropriations Committees review agency funding requests and propose levels of budget authority (BA).7 Appropriations acts passed by Congress set the amount of BA available for specific programs and activities. Authorizing committees, which control mandatory spending, and committees with jurisdiction over revenues also play important roles in budget decisionmaking.8

During the fiscal year, Congress and OMB oversee the execution of the budget.9 Once the fiscal year ends on the following September 30, the Department of the Treasury and the Government Accountability Office (GAO) begin year-end audits.

Budget Baseline Projections

Budget baseline projections are used to project the future influence of current laws and measure the effect of future legislation on spending and revenues. They are not meant to predict future budget outcomes. Baseline projections are included in both the President's budget and the congressional budget resolution. It is important to understand the assumptions and components included in budget baselines. In some cases, slight changes in the underlying models or assumptions can lead to large effects on projected deficits, receipts, or expenditures.

The Congressional Budget Office (CBO) computes current-law baseline projections using assumptions set out in budget enforcement legislation.10 On the revenue side of the budget, the 2017 tax revision (P.L. 115-97; see additional discussion below) enacted several changes to individual and corporate income tax rates and to other tax policy provisions that are set to expire before the end of the 10-year budget baseline window. On the spending side, baseline

4 The contents of the presidential budget submission are governed by 31 U.S.C. ?1105. For reasons why the budget may be delayed, see CRS Report RS20179, The Role of the President in Budget Development, by Clinton T. Brass. 5 For more information, see CRS Report RL30297, Congressional Budget Resolutions: Historical Information, by Bill Heniff Jr. 6 For information on deeming resolutions, see CRS Report R44296, Deeming Resolutions: Budget Enforcement in the Absence of a Budget Resolution, by Megan S. Lynch. 7 Budget authority represents the amounts appropriated for a program, or the funds that may legally be spent. Outlays represent the disbursed federal funds. There is generally a lag between when budget authority is appropriated and outlays occur, sometimes across fiscal years. 8 For more information on the appropriations and authorization process, see CRS Report R42388, The Congressional Appropriations Process: An Introduction, coordinated by James V. Saturno. 9 The fiscal year runs from October through September: FY2019 begins on October 1, 2018, and ends on September 30, 2019. 10 Many of the rules governing the baseline contained in Section 257 of the Balanced Budget and Emergency Deficit Control Act, as amended, were extended or modified as part of the Budget Control Act of 2011 (P.L. 112-25).

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The Federal Budget: Overview and Issues for FY2019 and Beyond

discretionary spending levels are largely constrained by the caps and automatic spending reductions enacted as part of the Budget Control Act of 2011 (BCA; P.L. 112-25) and further modified on several occasions, most recently with the Bipartisan Budget Act of 2018 (BBA 2018; P.L. 115-123).11

Since the CBO baseline assumes that current law continues as scheduled, it incorporates policy provisions in current law that have historically been revised before taking effect. Specifically, the CBO baseline assumes that discretionary budget authority from FY2019 through FY2021 will be restricted by the caps as created by the BCA as amended, and that certain tax policy changes enacted in the 2017 tax revision and in other laws will expire as scheduled under current law.12 This leads to baseline projections of lower spending and higher revenue levels relative to a baseline that would reflect policy changes some would consider likely given past actions (sometimes referred to as a "current policy" baseline).

In addition to these elements of current law, macroeconomic assumptions, including those related to GDP growth, inflation, and interest rates, will also affect the baseline estimates and projections. Minor changes in the economic or technical assumptions that are used to project the baseline also could result in significant changes in future deficit levels.

A summary of budget outcomes in the latest CBO baseline is provided in Table 1. CBO's current baseline projections, released in April 2018, show rising budget deficits over the next several years.13 This represents a reversal from the significant declines in inflation-adjusted deficits experienced in the past few fiscal years. Those declines were primarily due to continued increases in employment (which increased revenues collected from income and payroll taxes) and reductions in discretionary spending. While the baseline projections include continued declines in discretionary outlays, those reductions are more than offset by increases in mandatory spending. Mandatory spending increases are largely due to the rising cost of Social Security and Medicare programs, and declines in federal revenues.

Table 1. Selected CBO Baseline Budget Projections (% of GDP)

Budget Deficit Debt Held by the Public

FY2017 (actual) 3.5 76.5

FY2019 4.6 79.3

FY2023 5.2 87.9

FY2028 5.1 96.2

Source: Congressional Budget Office, The Budget and Economic Outlook: 2018 to 2028, April 2018, Summary Table 2.

Baseline projections also include increases in debt held by the public (or debt held by all entities other than the federal government) throughout the 10-year budget window. Debt held by the public finances budget deficits and federal loan activity, and is a function of three things: (1) the

11 The BCA allows for discretionary spending to be adjusted for war funding, disaster, emergency, and program integrity spending.

12 The 2017 tax revision included a number of reductions to individual income tax rates and tax expenditures that are scheduled to expire under current law, as discussed later in this report. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), passed as part of the Consolidated Appropriations Act, 2016 (P.L. 114-113; see additional discussion below), modified most of the previously expired tax provisions that had been extended several times by past Congresses. The PATH Act made many of those provisions permanent, while others were extended through the 2016 or 2019 tax year. Provisions that were not made permanent are assumed to expire as scheduled under the CBO baseline.

13 Unless otherwise noted, budget data in this report are taken from tables in CBO, The Budget and Economic Outlook: 2018 to 2028, April 2018.

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The Federal Budget: Overview and Issues for FY2019 and Beyond

size of existing debt, (2) economic growth, and (3) interest rates.14 Debt held by the public was 76.5% of GDP at the end of FY2017, and is projected to be 96.2% of GDP at the end of FY2028.

CBO also provides projections based on alternative policy assumptions, which illustrate levels of spending and revenue if current policies continue rather than expire as scheduled under current law. If discretionary spending increased with inflation after FY2018 instead of proceeding in accordance with the limits instituted by the BCA and tax reductions in the 2017 tax revision are extended, CBO projects an increase in the budget deficit of almost $2,400 billion relative to the current-law baseline, exclusive of debt servicing costs, over the FY2019 to FY2028 period. Beyond the 10-year forecast window, federal deficits are expected to grow unless major policy changes are made. This is a result of increases in outlays largely attributable to rising health care and retirement costs combined with little to no change in projected revenue levels over that timeframe.

Spending and Revenue Trends

Over the last seven decades, federal spending has accounted for an average of 19.3% of the economy (as measured by GDP), while federal revenues averaged roughly 17.2% of GDP. Spending has exceeded revenues in each fiscal year since FY2002, resulting in annual budget deficits. Between FY2009 and FY2012, spending and revenue deviated significantly from historical averages, primarily as a result of the economic downturn and policies enacted in response to financial turmoil. In FY2017, the U.S. government spent $3,982billion and collected $3,316 billion in revenue. The resulting deficit of $665 billion, or 3.5% of GDP, was higher than the average deficit from FY1947 through FY2017 of 2.1% of GDP. The trends in revenues and outlays between FY1947 and FY2017 are shown in Figure 1.

14 For more information on the interaction of deficits and debt, see CRS Report R44383, Deficits and Debt: Economic Effects and Other Issues, by Grant A. Driessen.

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